OSFI Solvency

  1. ORSA - Defn
    Internal assessment process, tailored to insurer’s own risk profile and appetite, and reflective of the nature, scale and complexity of the insurer.
  2. ORSA - Key elements and considerations
    1. Comprehensive Identification and Assessment of Risks
    2. Relating Risk to Capital
    3. Board Oversight and Senior mgt Responsibility
    4. Monitoring and Reporting
    5. Internal Controls and Objective Review
  3. Comprehensive id and Assessment of Risks
    • id and assess all material risks that could have material impact on financial health
    • captured in regulatory test or not
    • assess under normal and adverse scenarios
    • consider concentration/interaction
  4. Insurer should consider materials from other researchers for own capital needs
    materials on quantification of risks and mitigants from:
    1. Regulators, prof associations, cocnsulting firms
    2. Empirical data and studies of historical and potential new risks in dif markets
    3. Developments in insurance and impact on continued appropriateness of current tools, data, assumptions
    4. Bench-marking wrt. risk measurement, in insurance sector or other similar sectors
  5. Relating Risk to Capital
    • Tailor to nature, scale and complexity of insurer.
    • Determine capital requirements (by risk, aggregation/diversification)
    • Set internal targets
    • Integrate with other business areas
  6. Board Oversight and Senior mgt Responsibility
    • Board:
      • ultimate responsibility
      • ensure Sr mgt implement properly
      • understand impact of adverse events on financial condition
    • Sr mgt:
      • implement, mgt
      • report findings to Board
  7. Monitoring and Reporting
    • performed regularly to provide relevant info for mgt processes
    • regular reports for sr mgt / Board
    • formal report to Board
      1. info on process, methods, assumptions relative to risk appetite, strategic plans etc.
      2. enables Board to assess approrpiateness of ORSA
  8. Internal Controls and Objective Review
    • Internal controls to ensure consistent with risk appetite
    • review process to ensure ensure risks haven't changed and process to quantify risks still adequate.
  9. Areas in insurer's own regular review of ORSA
    • Comprehensiveness of assessment
    • Process for id risks, concentrations and interactions;
    • Appropriateness of methods and data;
    • Reasonableness of results
    • Consistency with risk appetite;
  10. Areas in Supervisory review of an insurer’s ORSA
    • Methodology and data supporting estimates of risks in regulatory capital;
    • Risks not in regulatory capital (reputation and strategic risk);
    • External factors incl stress testing
    • Limitations of ORSA
  11. Comprehensive id and Assessment of Risks - Risk considerations
    1. Emerging/Evolving risks
    2. Risk transfer/Mitigation (Reinsurance)
    3. Cross border activities (concentration risk, forex risk)
  12. Relating Risk to Capital - ORSA practices
    • Internal models to assess material complex risks, when not available, simpler approaches with conservatism
    • Risks hard to quantify: use expert judgement
    • Advanced methods to assess risks for competitive advantage
    • Methods to agg results and consider concentrations and interactions;
  13. Situations in which risk concentrations, dependencies and interactions can arise include exposures to:
    • One severe event
    • One reinsurer
    • One product
    • One distributor
    • Geographical regions
  14. ORSA vs. DCAT
    • similarities:
      • involve scenario/stress testing to id risks
      • submitted to regulators
      • done annually
      • forward looking
      • risk-based capital assessment
    • differences:
      • DCAT follows CIA SoP; ORSA follows OSFI guideline
      • DCAT is AA responsibility; ORSA is mgt responsibility
      • DCAT is mostly quantitative; scope of ORSA is large also incl qualitative analysis, governance and internal controls.
      • DCAT covers only prescribed risks; ORSA covers all relevant risks
      • DCAT is to demonstate satisfactory financial condition; ORSA process is to ensure appropriate ERM
  15. ORSA vs. MCT
    • ORSA considers more risks than MCT and includes all material risks
    • ORSA allows for a better qualitative assessment (e.g. internal control); MCT is only quantitative
    • ORSA is tailored to risk profile (internal target); MCT is a formula-based approach not company-speific
    • ORSA considers correlations between all risks; MCT only considers correlation between insurance and asset risk
    • ORSA incl assessment of internal controls to allow for better mgt of business
    • ORSA sets internal target to reflect own risk appetite
Card Set
OSFI Solvency
OSFI Own Risk and Solvency Assessment (Sound Business and Financial Practices)